"When" to buy - The tipping point hypothesis

[keithj]

I wonder if a state by state breakdown is around . would be interesting to know how much of the current increase is coming from WA , as opposed to other states.

Westpacs briefing on latest housing figures gives a state by state breakdown. You won't be suprised to hear that....

As for a state perspective, the upward trend in total owner-occupier finance is a national one. The resource rich ‘states’ are leading the way - Western Australia has surged 16% since mid-2005, while the Northern Territory is up 12.5%. Prospects are even on the improve for New South Wales, with finance up 6% over this period - despite a 3% pull-back in January. Finance is up by between 6% and 8% in South Australia, Queensland and Tasmania. Victoria has slipped behind the pack, up 3.5%, but volatility caused by changing state regulations may be a factor.

The graph shows number of OO loans covering 2001-6.

KJ

 

[Peter Parker]

I can't believe I am doing this (fanning the flames of indecision and over-analysis), but the answer may be found in a very basic economics concept.

Unless I have missed something on a reading of this thread, thus far people have talked only about the nominal interest rate.

The price of money is not the nominal interest rate, it is the real interest rate (inflation adjusted).

Someone else can pull the stats, but when you exclude the effects of CPI, then the real interest rates of the late 80's aren't far off the rental yields mentioned above.

A good point. Though using real interest rates (based on CPI) is only valid if wages are rising as fast as CPI. They are at the moment, but this has not always been the case.

Eg, for several years during the 80s, wages did not rise as fast as prices, so real wages fell, while the share going to profits rose. Though this had deletarious effects on housing affordability, it restored the profit share of GDP to 1960s levels and eliminated 'real wage overhang', which had been allowed to develop from the 1970s.

Peter

 

[redwing]

Looks Interesting Michael..

I buy when I can afford it..not too complex as I'd never be able to keep up with the research, it's hard enough choosing areas to look at, deciding on which property to buy etc etc..

 

[House_Keeper]

That's an interesting approach Michael.

I would rank it alongside Navra "Rental Reality" approach or Kieran Trass property cycle indicators.

For me, these broad indicators tell you when NOT to buy. To find out when to buy, I prefer to watch myt arget suburb very closely so that I am aware when buyers sentiment starts to pick up.

Cheers,

 

[MarkB]

A good point. Though using real interest rates (based on CPI) is only valid if wages are rising as fast as CPI. They are at the moment, but this has not always been the case.

Eg, for several years during the 80s, wages did not rise as fast as prices, so real wages fell, while the share going to profits rose. Though this had deletarious effects on housing affordability, it restored the profit share of GDP to 1960s levels and eliminated 'real wage overhang', which had been allowed to develop from the 1970s.

Peter, imho using real interest rates is always valid, whether one decides to look at the demand side of the equation or not.

But if one does decide to look at the demand side, it is only through comparing apples with apples (real interest rates and real household income) that an accurate picture can be drawn.

Since MW doesnt appear to be concerned at this stage with demand side implications, it is a moot point.

While I made the comment that buying IPs is not rocket science, MW was, as I understood it) in the process of developing a relatively simple indicator for the future prospects of any given RE market.

I think looking at demand side implications effectively opens a pandora's box of economic variables. It's natural to search for the best answer, but I do not believe that deeper analysis is neccesarily synonymous with better analysis.

There is a long list of factors influencing the performance of RE markets (and this is a non-exhaustive list):

- real interest rates
- real household earnings
- consumer sentiment
- expected returns available (rent and CG)
- returns available elsewhere (eg. equities, term deposits)
- local factors affecting the real estate market (supply, rezonings, etc)
- household formation and growth
- the impact of government policies (stamp duties, taxes, etc)
- LVR's / finance on offer


With each variable we add a layer of complexity. The logical conclusion is that we end up with a Computable General Equilibrium (CGE) model.

Personally, I'd rather leave that to the "experts".


Mark

 

[lizzie]

eeerk ... my head is spinning (or is that sponning).

i think, when i find what i think will be a good deal, i'll just run it thru the figures configuration that seems to work for me, and if it adds up i'll buy. regardless of the timing.

 

[Ray Brown]

A very interesting discussion,

Before buying our first house, we were habitual renters. We would have stayed renters - but for the looming GST on new houses.

We settled on a unit in June 2000, days before the GST and FHOG first came into being.

We decided to BUY because of several motivating factors...

• Interest Rates reasonable
• Rents relatively high
• About to have a baby
• GST introduction looming

We chose to avoid the GST instead of accepting the FHOG & The price of a new house was less than the cost of renting.

For its part in the investment boom, One factor which is often ignored is this...

The Internet has permitted far more people to consider buying for investment. Buying "sight unseen" doesn't have the same dire reputation as it once had. Photos immediately available on the net, sales data, property forums, economic data etc.

Last year I found, researched, financed and bought a house - All via internet, e-mail and some post (the dinosaur bank), with a short inpection to make sure the fung-shui-yin-yang thing was OK.

It is managed it via e-mail, accounted for it on my laptop then banking and tax returns are completed - ALL ELECTRONICALLY.

This one factor may have been fundamental in the rise of the Mum and Dad investor, and the large unprecedented effect this has had on RE prices.

SELL!

 

[MichaelW]

eeerk ... my head is spinning (or is that sponning).

i think, when i find what i think will be a good deal, i'll just run it thru the figures configuration that seems to work for me, and if it adds up i'll buy. regardless of the timing.

Lizzie,

Good approach! But, from your other posts, your strategy seems to be a reno to add value approach. So, you're not dependent solely on market driven capital gain to deliver your profits. Well done by the way, awesome results thus far!!

I guess I was just trying to develop some more lead indicators of potential imminent property booms. My approach is predominately a buy and hold for capital gain with minimal reno work done. I will do a bit of a tidy up on an IP to improve its yields and try and create some instant equity, so like you, I'll buy when I spot the opportunities to do these. But, should the market look like exploding, then I want some advance warning so I can buy just about ANYTHING and the numbers be damned!

In truth though, before I did that I'd want to see some signs of life in the market as well as my lead indicators aligning. Its all just part of my toolkit. My strategy will depend on where we are in the cycle as I think different strategies work best in different stages of the cycle. Kieran Trass mentioned this in his book. In the slump phase where we are now, then the reno to add value approach is the better one. In boom days, buy quality for growth and ride the wave out.

Cheers,
Michael.

 

[MichaelW]

This one factor may have been fundamental in the rise of the Mum and Dad investor, and the large unprecedented effect this has had on RE prices.

SELL!

And that effect is only going to become more of a factor in coming booms. The next one is going to be a doozey!

So, don't SELL, BUY!

Cheers,
Michael.

 

[MichaelW]

Some very interesting stats to add into the mix...

Full article here.

Lower interest rates have eased the pain of higher debts. The average home-buyer spends $287 a week on housing, which, adjusted for inflation, is just 18.5 per cent more than eight years ago.

Average incomes have risen by a similar amount, which means there has been no change in the 19 per cent share of gross income consumed by housing.

Nor has there been any change in the number of people parting with more than 30 per cent of their income to support a mortgage, which has remained steady at a little more than 15 per cent for the past six years.

So, if I read this correctly, the historic correlations remain true. People spend the same amount today on their housing bill as they have done in the past. This would suggest that there definately is an "affordability" correlation between renting and buying that holds through time.

So, using a metric which has affordability at its core may not be too much of a stretch.

Cheers,
Michael.